Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday August 27, 2018.

Stocks closed higher Friday after Fed Chair Jerome Powell, in a speech at the Jackson Hole Symposium in Wyoming, said he sees further gradual rate hikes moving forward, noting the economy is strong and can handle tighter monetary policy. For the day, the Dow Jones Industrial Average rose 0.52 percent to close at 25,790.35. The S&P added 0.6 percent to close at 2,874.69. The Nasdaq advanced 0.9 percent and closed at 7,945.98. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to close at 11.99.

Oil prices closed up but off intraday high Friday amid worries that Iran sanctions could curb output. U.S. West Texas Intermediate crude rose 89 cents, or 1.3 percent, to $68.72. For the week, WTI gained 4.3 percent, snapping a seven-week losing streak. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose 1.3 percent to 42.05, up more than 13 percent YTD while the S&P gained more than 7 percent. Now the question is whether the rally has more legs? Below is an update look at a trade in XOP.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges. As shown, the underlying is in a short-term bullish trend when the price bars are painted in green. The underlying is in a short-term bearish trend when the price bars are painted in red. The yellow bars identify period of neutral or sideways trading pattern. Additionally, the light-blue shading represents the short-term trading range. A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading). Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – SPDR S&P Oil & Gas Exploration & Production ETF (weekly)

Our “U.S. Market Trading Map” painted XOP bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the falling trend starting in summer 2014. The second dominant feature of the chart is the upward trend since early 2016. The early 2018 rally pushed the ETF above the 4-year moving average, signify a potential bullish reversal. The July overbought consolidation retested the support. Last week’s bullish upside reversal indicated that the support will hold and a retest of key resistance near 45, based on the 38.2% Fibonacci retracement, should be expected. That level was tested in late 2016 and again in May-July 2018. This history indicated an important role in terms of resistance. A sustain advance above it has measured move to around 53, or the 50% Fibonacci retracement.

XOP has support near 38.50. Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish. Last changed August 21, 2018 from neutral (see area ‘A’ in the chart).

S&P climbed above the early 2018 high after recent pullback found support near the lower boundary of the pink band. Momentum shifted higher from near overbought zone, a sign that selling pressure had eased. This is a short-term bullish development, allowing additional upside probing and opened up for a test of the important sentiment 2900 mark. That level roughly corresponds with the lower boundary of the red band. As it was the case of late, a close above that level often marked short-term top market top. Traders should keep it on the trading radar.

Short-term trading range: 2840 to 2900. S&P has support near 2840. A close below that level has measured move to around 2800, based on the trend channel moving average. The index has resistance near 2900, based on lower boundary of the red band.

Long-term trading range: 2700 to 2900. S&P has long-term support near 2700. A close below that level will trigger a major sell signal with a downside target near 2500. The index has resistance near 2900.

In summary, S&P broke above key resistance Friday, resumed the major uptrend with initial upside target near 2900. Nevertheless, it will be important to monitor the rally and retreat behaviors over the next few days to determine whether breakouts are decisive.

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday August 9, 2018.

We’ve noted in the previous Market Outlook that: “overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited.” As anticipated, the S&P closed just below the flat line at 2,857.70 as traders digested the latest U.S.-China trade developments. The Chinese Ministry of Commerce announced a 25 percent charge on $16 billion worth of U.S. goods. The Dow Jones Industrial Average slipped 0.18 percent to close at 25,583.75. The Nasdaq Composite gained less than 0.1 percent to close at 7,888.33. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 10.85.

One of the noteworthy developments in recent days has been the move in energy and energy related stocks. The group has been under selling pressure in recent days after Donald Trump said gasoline prices are too high and asked Saudi Arabia to increase its oil output. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell more than 3 percent MTD, bringing its YTD gains down to just above 12 percent. Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse? Below is an update look at a trade in XOP.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges. As shown, the underlying is in a short-term bullish trend when the price bars are painted in green. The underlying is in a short-term bearish trend when the price bars are painted in red. The yellow bars identify period of neutral or sideways trading pattern. Additionally, the light-blue shading represents the short-term trading range. A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading). Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – SPDR S&P Oil & Gas Exploration & Production ETF (daily)

Our “U.S. Market Trading Map” painted XOP bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XOP has been basing sideways using the 50-day moving average as support as traders digested the July massive selloff. The fact that the ETF consolidated in narrow trading range as it worked off oversold condition rather than bouncing higher indicating an internal weakness. This is a bearish development, suggested that XOP might have to move to a much lower level to attract new buyers. XOP has minor support near 40.70. A close below that level has measured move to 38.

XOP has resistance near 43. Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish. Last changed August 7, 2018 from neutral (see area ‘A’ in the chart).

As expected, S&P retreated after a test of resistance at the red band was met with a new wave of selling interest. Momentum indicator shifted lower from overbought zone, suggesting further short-term weakness likely. Adding to concerns in the negative divergence on Money Flow measure, which peaked in late July and formed a lower high as prices broke out earlier this week. Technically speaking, this trading pattern exhibits characteristics of a distribution phase, the period in which smart money sell (distribute) their positions. The distribution phase is a very emotional time for the markets, as investors are gripped by periods of complete fear interspersed with hope and even greed as the market may at times appear to be taking off again. Prices can often stay locked in a trading range that can last a few weeks or even months. With this in mind, we’d look a trim positions into overbought strength.

Short-term trading range: 2800 to 2864. S&P has support near 2800. A failure to hold above that level has measured move to around 2779, based on the trend channel moving average. The index has resistance near 2864, or the lower boundary of the red band. A close above that level will trigger acceleration toward the range top, near 2900.

Long-term trading range: 2690 to 2880. S&P has long-term support near 2690. A close below that level will trigger a major sell signal with a downside target near 2580. The index has resistance near 2880.

In summary, our work on price pattern and momentum suggested that S&P could be in an early stage of a distribution phase. On balance, we’re cautiously optimistic on stocks over the short-term and look to trim positions into overbought strength.